Subdued but strong

Gordon Brown has delivered one of the most subdued Budgets in recent memory but against the noisy background of the tax increases that he announced last year finally coming into effect. The net impact of yesterday's measures can be looked at in one of two ways. Either it is mildly contractionary, because it withdraws a modest £500m from the economy; or it is mildly expansionary, if you assume that the contingency that was put in to cover "additional budget policy decisions" will be spent. But, either way, an appendix to the budget "red book" confirms that a large total of almost £12bn of purchasing power will be extracted from the economy in the next three years as a result of already announced tax increases. These increases, which include this week's £8bn rise in national insurance contributions, are absolutely necessary to finance the expansion of health and education - and, fortuitously, to provide some counter-cyclical expansion when it is most needed. But their absence from this year's budget speech lent it an air of deceptive calm.

Even within this calm, Mr Brown managed to fire a blistering salvo of microeconomic measures to boost enterprise, help the poor, restore work incentives and protect the environment. He may one day be remembered as much for his micro measures as for his prudent management of the economy overall. The biggest single cost was £350m to kick start the admirable scheme to endow babies with up to £500 at birth - to which relatives and friends can add at any time - providing welcome capital when they are grown up. One of the most headline- catching measures was getting rid of the gambling tax on bingo (cost £20m) but the chancellor also has his own personal gamble: that world economic growth will nearly double to 8.5% next year to help the UK back to growth of 3.25% in 2004. The other is that consumer spending, which accounts for three quarters of economic activity, will remain relatively strong. The Treasury plausibly argues that most of the increased tax burden since the last Budget falls on corporate shoulders and that pensioners do not pay NI contributions at all. Some 50% of families with children are not only better off overall (despite the NI rises) but are also more likely to spend any income increases they receive, thereby boosting consumption. Even so, consumers may not feel so confident at a time when taxes appear to be rising around them.

In the end no one actually knows whether there will be a post-Iraq global recovery or whether consumers will rein in their spending. The important point is that the chancellor has done about as much as he can to control the things he can control. The budget deficit is getting worse, but if other forecasts come true it will not break his "golden rule" to balance the current (ie non-capital) Budget over the economic cycle. Mr Brown's gloating about the UK's superior economic performance over euroland may send some ill-disguised signals about his views on joining the euro; but it also poses some questions that need answers. The UK economy may be growing more slowly than intended but it is still the best performing large economy outside the US. Mr Brown intends to keep that going until he has eliminated involuntary unemployment. No chancellor in recent memory has a better chance of achieving this noble aim.